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UNCLAS OSLO 000002
SIPDIS
SENSITIVE
PARIS FOR USOECD
STATE FOR EUR/NB RDALLAND; EB/ESC SGALLOGLY, RGARVERICK
USDOC FOR 4212 MAC/EUR/OEURA
DOE FOR S-3 GBISCONTI, PI FOR DCONOVER, JBRODMAN,
EROSSI, FE FOR JSWIFT, JSLUTZ
E.O. 12958: N/A
TAGS: ECONEFINELABEPETETRDNO
SUBJECT: NORWEGIAN ECONOMIC HIGHLIGHTS, NOVEMBER- DECEMBER 2005:
STRONG 2005 ECONOMIC PERFORMANCE
-------
Summary
-------
¶1. (SBU) Summary of combined November-December
monthly highlights:
* The past year was an exceptionally good one for
the Norwegian economy: mainland real GDP grew by
3.9 percent; offshore petroleum investments reached
a record high; the value of exports soared on
account of rising crude oil prices; and the rich
Government Petroleum Fund topped USD 200 billion.
* Norway's medium-term economic outlook is bright.
The Central Bank expects low interest rates to
contribute to sustained growth, though decelerating
offshore oil and gas investments could lead to
somewhat lower economic growth beyond 2006.
* Norway's Petroleum and Energy Minster confirmed
that the 19th petroleum concession licensing round,
which opens up additional Norwegian Sea and Barents
Sea acreage, will go ahead as planned. Twenty-four
firms submitted bids for acreage in these areas in
November.
* Norway's 2005 offshore oil and gas investment is
forecast to reach a record USD 13.7 billion.
* The new center-left government has indicated it
will cease selling off shares of state-owned or
controlled companies, including petroleum sector
leaders Statoil and Norsk Hydro.
* Norsk Hydro announced that the company has made a
significant find in Iran's Anaran field and will
open discussions with Iranian authorities on
developing the field.
* Little-known Norwegian petroleum independent DNO
announced a potential major oil strike in a
controversial project in Kurdistan and another in
Yemen, sending the price of its stock soaring.
* American petroleum service firm National Oilwell
Varco's $700 million investment in Norway was saved
when the Renewal Ministry reversed a Competition
Authority order that the company divest its local
holdings due to their anti-competitive effect.
* U.S. petroleum investment in Norway took another
leap when Texas-based Noble Corp. announced plans
to purchase the Norwegian offshore drilling
contractor Smedvig ASA, a $650 million deal.
* The word's longest (future) undersea natural gas
pipeline, under construction between northern
Norway and the UK, has reached the halfway point.
* Norway will impose stiff new taxes on light
trucks next year that are expected to slash U.S.
light truck imports by 90 percent.
* Russia, citing elevated levels of cadmium and
other heavy metals in Norwegian salmon, announced
it would ban Norwegian seafood imports effective
January 1.
* Norway will require employers to pay a percentage
of salaries into private pension funds next year,
the first measure of its kind in Europe.
* The new center-left government raised taxes and
increased public spending in amendments to the 2006
budget, but signaled that it would not tap into the
$200 billion petroleum fund for social spending.
End Summary.
Norway's Strong 2005 Economic Performance
--------------------------------------------
¶2. (U) Norway's economic performance over the past
year has been impressive. Norway enjoyed one of
the highest growth rates among OECD countries.
Mainland GDP grew by 3.9 percent in real terms over
the past year. Record offshore petroleum
investments, forecast at around USD 14 billion for
the year, and low interest rates contributed to the
rapid growth. High petroleum investment levels
were spurred by high capital outlays on Norway's
two leading petroleum projects: the Snoehvit LNG
development off Hammerfest and the Ormen Lange gas
project.
¶3. (U) The Norwegian economy is still in a cyclical
upturn. Unemployment remains low at an average of
4.5 percent for the year, though December saw an
uptick to 4.8 percent. The Consumer Price Index
edged up slightly in 2005 because of rising energy
costs, but inflation remained very low at an
average rate of only 1.5 percent for the year.
Inexpensive imports from Asia and Central Europe
continue to dampen inflationary pressures.
¶4. (U) With crude oil prices hovering near record
highs for much of the year, Norwegian merchandise
exports rose strongly, 19.5 percent by value.
Norway's current account surplus swelled to USD 46
billion. Thanks largely to the growing current
account surplus, Norway's Government Petroleum Fund
(GPF), which is invested in overseas bonds and
equities, rose to USD 209 billion in December. The
GPF now roughly equals the United States' largest
pension fund, the California Public Employees'
Retirement System.
Economic Outlook: Slowing but Solid Growth
--------------------------------------------- -
¶5. (U) According to Central Bank of Norway economic
projections, continued low interest rates should
contribute to sustained growth over the coming
year. A decline in offshore oil and gas investment
from current record high levels, however, is
expected, tending to dampen economic growth. The
Central Bank projects that 2006 real mainland GDP
growth will slow to 3.3 percent from this year's
3.9 percent. The Bank forecasts more moderate
growth in medium term, in the 2.5 percent range in
2007-2008. To prevent the economy from
"overheating," the Norwegian Central Bank raised
key domestic interest rates (sight deposit rates)
in November by 25 basis points to 2.25 percent, the
second rate hike since August.
Record Norwegian Petroleum Investments
---------------------------------------------
¶6. (U) Norway's 2005 offshore oil and gas
investments are expected to top USD 13.7 billion, a
new record. Norwegian Petroleum and Energy
Minister Odd Roger Enoksen was quoted as saying
that sharply higher crude oil prices are
stimulating investment in Norway's offshore
petroleum sector. The Snoehvit and Ormen Lange gas
projects account for the bulk of the investment,
but increased exploratory drilling is also
contributing. Enoksen said that Norway's goal is
to maintain and build upon its world class
extraction technology and its expertise in
environmentally sound exploration and extraction
techniques. Looking towards 2006, Snoehvit and
Ormen Lange investment numbers are expected to
decline, but total 2006 investment should remain
high, at around USD 12 billion.
19th Oil/Gas Licensing Round Goes Forward
--------------------------------------------- -----
¶7. (SBU) Norway's 19th petroleum concession
licensing round, which will open additional Barents
Sea acreage to exploration, is proceeding on
schedule. Some observers had feared that Norway's
new center-left government, which contains elements
strongly opposed to Barents drilling, might
sidetrack the round. Speaking on the margins of a
London petroleum conference, Petroleum Minister
Enoksen confirmed that the new government would
award the full 64 blocks in the Barents and
Norwegian Seas, as planned by its predecessor.
Enoksen noted that environmental protection and
preservation of fishing grounds were important
concerns, but should not suffer by going forward
with the new licensing round.
¶8. (U) Twenty-four petroleum firms, including all
U.S. companies active in Norway but ExxonMobil,
submitted 19th round bids in November for new
Barents Sea and Norwegian Sea licenses. The
Petroleum Ministry expects to award the new
production licenses towards the end of the first
quarter of 2006. Minister of Petroleum Odd Roger
Enoksen, commenting on the bid submissions, said he
was "very pleased with the interest the companies
are demonstrating for new exploration opportunities
in the Barents Sea and the Norwegian Sea . . . it
is clear that the competition for acreage is
increasing also in frontier parts of the shelf."
Privatization Frozen
--------------------
¶9. (SBU) Petroleum Minister Enoksen confirmed
reports that the new center-left government would
not sell additional shares in state-owned Statoil
and state-controlled Norsk Hydro, Norway's two
largest oil companies. The government owns 70.9
percent of Statoil and 43.8 percent of Norsk Hydro.
Enoksen's announcement is consistent with the new
government's stance that further privatization of
Norway's major state-controlled firms should be
halted. Some members of the new government have
even advocated that the state reacquire shares it
had previously divested.
Hydro Strikes it Big in Iran
-----------------------------
¶10. (U) Norsk Hydro announced in early December
that the it may have struck significant oil in
Iran's Anaran field, where it has been exploring in
partnership with Russia's Lukoil. Hydro says the
discovery could possibly be the largest in 20
years. Hydro owns 75 percent of the field while
Russian Lukoil owns the rest. The company has
delivered its Development Plan to Iranian
authorities and will seek to conclude a development
agreement. A Hydro executive said Anaran "could
prove to be one of the most important finds in
recent years," yielding as much as 200,000 barrels
per day.
¶11. (SBU) Hydro executives say the company is in
Iran for the long haul. Spokesman Tor Steinum said
Hydro intended to initiate talks with Iranian
officials regarding long-term development projects.
Hydro CEO Eivind Reiten also emphasized in a public
statement that Norsk Hydro would pursue exploration
and development projects in Iran, notably at Anaran
and in the Khorramabad exploration block. The
investments naturally raise Iran-Libya Sanctions
Act concerns for the United States.
DNO Strikes it Big in Iraq, Yemen, and Oslo Bourse
--------------------------------------------- -----
¶12. (U) The small, independent Norwegian oil
company Det Norske Oljeselskap (DNO) announced in
December that it struck oil with its first well in
the Kurdish region of Iraq. DNO has not estimated
the size of the find, saying that more testing is
needed, but believes the reservoir could be very
thick.
¶13. (SBU) DNO entered into a controversial
exploration agreement with the regional Kurdish
government, which central authorities in Baghdad
may or may not have blessed, in 2004. The new
Iraqi constitution is reportedly murky on the
authority granted to regional authorities to enter
into such arrangements. DNO Managing Director
Helge Eide told the press that he was confident
that the deal was consistent with the new Iraqi
constitution.
¶14. (U) Following on the heels of the Iran news,
DNO announced in late December that it also may
have hit oil in Yemen's Nabrajah field. DNO owns
56.7 percent of the field, Oil Search (Australia)
owns 28.3 percent, and the Yemen Company completes
the partnership with 15 percent. The announcements
have propelled the obscure company to the top of
the most traded list on the Oslo stock exchange and
have doubled the value of the stock in the last
month.
Norway Rescinds Divestiture Order to U.S. Oil Firm
--------------------------------------------- ------
¶15. (SBU) In November the Ministry of Renewal
overturned a National Competition Authority (NCA)
order to National Oilwell Varco (NOV), a leading
U.S. petroleum service firm, to divest its assets
in Norway. The NCA issued the divestiture order,
which jeopardized NOV's $700 million local
investment, because it found that a global merger
between National Oilwell and Varco had
anticompetitive effects on the Norwegian
Continental Shelf. The Renewal Ministry ruled,
however, that the NCA had defined the relevant
market too narrowly in focusing only on the Shelf
and that the market for drilling equipment was, in
fact, global. Embassy staff and NOV executives
cooperated closely in campaigning for a reversal of
the divestiture order.
Texas' Noble Corp to Buy 40 Percent of Smedvig
--------------------------------------------- ------
¶16. (U) U.S. investment in the Norwegian petroleum
services sector received another boost in December
when Texas-based Noble Corporation, one of the
world's largest offshore drilling contractors,
announced its intent to acquire 40 percent of
Smedvig ASA, a leading Norwegian offshore drilling
firm. The deal is reportedly worth about USD 650
million. Smedvig has operations in nine countries
and a workforce of 3,750 employees, more than half
outside Norway.
Ormen Lange Gas Pipeline Halfway to England
--------------------------------------------- --
¶17. (U) Norsk Hydro's $10 billion Ormen Lange
project reached a milestone in November when the
project's subsea gas pipeline, which when completed
will be the world's longest, reached the half-way
mark. The 1,200 kilometer pipeline will run from
Nyhamna in northwest Norway to Easington in the
UK. The pipeline will eventually move some 70
million cubic meters of gas annually from the Ormen
Lange field to the UK, providing up to 20 percent
of Britain's gas supplies.
Hefty Taxes Likely to Kill U.S. Light Truck Imports
--------------------------------------------- ------
¶18. (SBU) In November, Norway's new left-of-center
government enacted a hefty new tax on light trucks
(3.5 to 7.5 tons), effective January 1, 2006. The
tax will increase retail prices by 50 to 90 percent
and severely curtail demand for the vehicles, many
originating in the U.S. American automobile
importers protested the tax and its quick
implementation deadline, which did not allow
sufficient time to land vehicles currently in ocean
transit in Norway. Faced with significant losses
on more than 100 trucks ordered before the
announcement, but still in transit, importers
lobbied the Finance Ministry for an extension.
¶19. (SBU) The Embassy successfully made the
importers' extension case to the Finance Ministry,
which agreed just ten days before the deadline to
postpone the implementation date to April 1. The
Embassy and U.S. truck importers, who expect the
tax to slash sales from more than 1,000 in 2005 to
100 or so in 2006, will continue to work for its
rescission.
Russia, Citing Metal Levels, Bans Norwegian Salmon
--------------------------------------------- -----
¶20. (U) Norway risks losing the Russian market, its
largest, for fresh and frozen fish if a resolution
is not found to a dispute over levels of cadmium
and other metals in Norwegian fish. Russian
veterinary inspectors claim to have found unusually
high heavy metal levels in Norwegian farmed salmon
and fish feed. Russian agricultural officials
announced December 20 that Russia would cease
buying not only farmed salmon, but all Norwegian
seafood as of January 1, 2006. Russia is the
largest importer of Norwegian fish products,
purchasing over $200 million worth of Norwegian
salmon alone in 2005.
¶21. (U) Singapore, a large importer of Norwegian
salmon, subsequently conducted its own inspections
and concluded that Norwegian farmed salmon
contained no heavy metals and was safe for
consumption. Japan also conducted tests that
backed up Singapore's results.
¶22. (SBU) Fisheries Ministry officials plan to
discuss the dispute with Russian authorities on
January 12 in Moscow. Most observers in Oslo
believe the measure is politically motivated,
probably in retaliation for Norway's recent
seizures of several Russian fishing trawlers
fishing illegally in its waters. One Norwegian
official wondered whether the ban would extend to
Norwegian fish caught by poaching Russian trawlers.
New Mandatory Pension Payments to Private Funds
--------------------------------------------- -----
¶23. (U) In an effort to mitigate the financial
pressure Norway's aging population is placing on
its generous pensions system, the Parliament
enacted a bill on December 20 that requires
employers to pay two percent of an employee's
salary into private pension funds. The measure,
which takes effect July 1, 2006, is the first of
its kind in Europe. Annual contributions are
forecast at between $440-$590 million. Private
asset management companies, banks and insurance
companies are lining up to break into this new
market.
New Government Raises Taxes and Spending
-------------------------------------------
¶24. (SBU) The new center-left government unveiled
several "socialist-style" measures in its November
amendments to the 2006 budget adopted by the
preceding center-right government in October.
While the revised budget still calls for a surplus
of USD 38 billion, the new government increased
spending by USD 1.2 billion and raised taxes by USD
1.9 billion. Finance Minster Kristin Halvorsen,
leader of the Socialist Left Party, justified
higher tax rates on medium to high incomes and
higher excise taxes as necessary to finance more
public spending on local government. In a more
fiscally conservative move, Halvorsen indicated
that the new government would not tap into Norway's
$200 billion petroleum fund for social spending, as
many have urged.
----- Key Economic Indicators for Norway [a] ------
- GDP Growth:
Volume Growth [Pct]
Category 2004 2005 2006 2007 2008
-------- ---- ---- ---- ---- ----
Private Consumption 4.4 3.8 3.8 2.5 2.3
Public Consumption 2.3 1.8 2.0 1.8 3.0
Oil and Gas Investm. 12.3 20.0 2.5 [2.5][5.0]
Mainland Invest. 6.1 7.8 6.0 3.3 2.5
Exports 0.9 3.5 2.7 3.5 3.3
Imports 9.1 7.3 4.5 2.3 1.8
--------------------------------------------- -----
Mainland GDP 3.5 3.9 3.3 2.5 2.5
--------------------------------------------- -----
Total GDP 2.9 2.5 2.8 2.3 2.3
--------------------------------------------- -----
- Unempl. Rate[Pct][b] 4.5 4.5 4.0 4.0 4.0
- Inflation [Pct][c] 0.4 1.5 2.0 2.0 2.5
- Wage Growth [Pct] 3.5 3.5 4.3 4.5 4.5
- Int.Rate [M.Mkt;Pct] 2.0 2.1 2.2 2.2 2.4
Current Account
Balance [NOK Bill] 228 319 416 366 356
- Crude Oil Price [d] 257 356 368 311 312
- Foreign Exch. Rate
[NOK/USD] 6.7 6.4
- U.S. Exports to
Norway [USD Bill][e] 1.60 1.83
- U.S. Imports From
Norway [USD Bill][e] 6.51 7.01
--------------------------------------------- ------
Notes: [a] Sources: The Ministry of Finance; The
Norwegian Central Bureau of Statistics [CBS]; The
Central Bank; [b] Surveyed unemployment; [c]
Consumer price inflation; [d] Brent Crude Spot
Price: NOK/Barrel; [e] Source: USDOC
WEBSTER
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